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Anglo American in Deal to Take Control of De Beers

By Mark Scott November 4, 2011 5:49 amNovember 4, 2011 5:49 am

Paul Hilton/Bloomberg NewsA diamond on display at a De Beers store in Hong Kong.

6:10 p.m. | Updated

LONDON — The mining giant Anglo American said Friday that it had agreed to pay $5.1 billion in cash to the Oppenheimer family to increase its stake in the De Beers Group, the diamond company, to as much as 85 percent.

The deal will end the Oppenheimer family’s 80-year control of De Beers, which was founded in 1888 and still accounts for more than one-third of the world’s rough diamond production, with operations across Africa and Canada. The family did not reveal its reasons for giving up control, but analysts indicated it was in order to diversify their investment holdings.

Anglo American, based in London, said it had reached an agreement with CHL and Centhold International Limited — companies that represent the interests of the Oppenheimer family — to acquire up to an additional 40 percent share in the diamond company.

Anglo American already owns a 45 percent stake in De Beers, and expects to complete the takeover by the second half of 2012.

“This transaction is a unique opportunity for Anglo American to consolidate control of the world’s leading diamond company,” Anglo American’s chief executive, Cynthia Carroll, said in a statement.

Initially, investors reacted positively to the announcement. In early morning trading in London, Anglo American’s share price rose by as much as 4 percent. But by the end of the day, those gains had been given back, with the shares down 0.76 percent. So far this year, Anglo American’s share price has fallen 31 percent as international commodity prices have generally declined on fears about the global economy.

And yet, demand for diamonds, particularly in fast-growing emerging markets like China and Brazil, has been strong. Rising middle classes in those countries have a growing appetite for luxury goods, including jewelry.

China, India and nations in the Middle East, for example, could represent 40 percent of global demand for diamonds by 2015, according to De Beers. In the first half of 2011, the company’s sales rose 33 percent, to $3.5 billion, on the strength of a 35 percent increase in the price of its diamonds.

With demand for diamonds expanding rapidly in emerging markets, Anglo American’s acquisition of De Beers would help cement its place in the multibillion-dollar diamond market, said Rob Clifford, an analyst for Deutsche Bank in London.

“This is a safe way for Anglo to spend its money,” said Mr. Clifford, who added that the $5.1 billion deal for De Beers was 21 percent below Deutsche Bank’s valuation of the business. “They know the business really well, and with prices for companies down at the moment, it’s a good time to buy.”

The acquisition will be covered by Anglo American’s cash reserves and an existing bank credit line of $3.5 billion, the company’s finance director, René Medori, said during a conference call.

Despite continued uncertainty about the global economy, Anglo American reported a $3.9 billion net profit in the first half of 2011. That compared with a $2 billion net profit for the comparable period last year.

Anglo American’s deal for De Beers is the latest in a number of mergers and acquisitions in the mining sector this year. According to the data provider Thomson Reuters, deals worth $176 billion have been announced in 2011 to date, a 48 percent increase compared with the same period last year.

Deals include the $7.5 billion purchase of the Australian copper producer Equinox Minerals by the Barrick Gold Corporation of Canada, the world’s largest gold company, and the $4.9 billion deal that Cliff Natural Resources of Cleveland made for the Canadian mining exploration firm Consolidated Thompson.

While this most recent transaction gives Anglo American full control over De Beers, the deal includes a stipulation giving the government of Botswana, another De Beers shareholder, the chance to increase its stake in the company to 25 percent from its current 15 percent. If Botswana exercises that option, Anglo American’s biggest share would be limited to 75 percent.

“This has been a momentous and difficult decision, as my family has been in the diamond industry for more than 100 years,” Nicky Oppenheimer, the chairman of De Beers and grandson of the founder, said in a statement. “After careful and deliberate consideration of the offer, and what is in the best interests of the family, we unanimously agreed to accept Anglo American’s offer.”